FTIL chief Jignesh Shah arrested, but why are brokers left free?

For an exchange to commit a fraud of such magnitude, it would need the help and active participation of multiple layers.

Members need to be convinced to take membership of the exchange.

These members, in turn, would be required to bring in ‘anchor clients’ who would trade and help finance the financial product.

It would have been impossible for NSEL to pull off the scam without the help of others.

Financial products of the kind that were being traded need to be explained to the members and clients before they are convinced to participate.

In other words, the entire gameplan and how money will be made has to be clear on day one before a rupee is invested. NSEL case was no different -- everyone knew what was being traded and how money would be made.

A Business Standard report says that Jignesh Shah, promoter of Financial Technologies and allegedly the brain behind the payment crisis, used the NSEL’s system to launch a’ vyaj This ‘vyaj badla’ system (which is basically a risk-free arbitrage financing product that was in use in the stock markets before Futures and Options were launched) generated returns to the tune of at least 14-18 per cent and during times of high volatility, it was known to have given 30 per cent returns.

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Image: A man moves an advertising poster bearing the MCX-SX logo at their Exchange Square building in Mumbai. Photographs: Vivek Prakash/Reuters

FTIL chief Jignesh Shah arrested, but why are brokers left free?

Brokers and their clients actively participated in the game and made a good amount of money till the government decided to stop it.

Everyone involved in the game knew and should have known of the risk involved. A Business Standard report says that broking houses went a step further and used to frontrun trades and change client’s code to benefit themselves.

Investigating agencies have finally taken Jignesh Shah, promoter of Financial Technologies into custody, ten months after the scam broke out.

With this, the total number of arrests has gone up to 11. All those in the dock have been working for Jignesh Shah.

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Image: All those who were working with Jignesh Shah have also been arrested.Photographs: Vivek Prakash/Reuters

FTIL chief Jignesh Shah arrested, but why are brokers left free?

With the brain behind the exchange's payment crisis in their clutches, investigators are expected to spread the net wider.

Reports indicate that NSEL brokers will now face the heat and rightly so.

While Jignesh Shah’s employees had the vested interest of their company at stake, brokers and clients who are playing victim are equally to be blamed.

In a game of greed, nobody complains as long as they are making money, but when the music stops you find the losers making the loudest noise.

D Arvind Mayaram, secretary of Department of Economic Affairs, whose panel submitted a fact-finding report to the FM and PM, while meeting the ‘aggrieved investors’ asked them a simple and direct question: "You are high net worth individuals and well informed; why did you trade on the NSEL?" The only reason these investors did, was the lure of earning an assured 14-18 per cent.

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Image: Prominent brokers are also learnt to be involved in the NSEL scam.Photographs: Reuters

FTIL chief Jignesh Shah arrested, but why are brokers left free?

Nearly 200 brokers are said to be involved in the scam, and the list includes some of the big names in the broking industry.

Though on the monetary front there is unlikely to be a spillover effect on the stock markets, in terms of reputation and legal scrutiny, there is no reason why these brokers should not face the heat.

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Image: NSEL offered a pair of contracts for which settlement was due in two days and a second for which settlement was due in 25-50 days. This allowed speculators to make financial returns without actually taking physical possession of commodities.Photographs: Ali Jarekji/Reuters

FTIL chief Jignesh Shah arrested, but why are brokers left free?

But the role of government and monitoring agencies also needs to be scrutinised. Forward Market Commission (FMC) had warned the government nearly a year before the scam broke out about the wrongdoings in the exchange, yet the government did nothing about it.

Warehouse receipts were issued and traded even though there was nothing in the warehouses.

These warehouses were supposed to be monitored by the government.

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Image: With the brain behind the exchange's payment crisis in their clutches, investigators are expected to spread the net wider. Photographs: Reuters